Recession replaces debt as top EU worry with joblessness rising

European leaders are loosening the economic shackles once demanded by Germany as the recession and mounting unemployment in southern Europe shove aside the debt crisis as the euro area’s biggest headache.

A two-day Brussels summit starting today will endorse plans for “structural” assessments of national budgets, according to a draft statement, using code for granting countries such as France, Spain and Portugal extra time to bring down deficits.

“We have to restore sound and sustainable public finances, via continued differentiated fiscal consolidation and focused on structural efforts,” European Union President Herman Van Rompuy said at a pre-summit briefing.

European politicians are cloaking the shift in language designed to reassure investors who have driven borrowing costs lower since mid-2012 that balanced budgets remain the goal. The relative calm in markets was barely disturbed by last month’s inconclusive election in Italy. Another milestone toward overcoming the crisis came yesterday, when Ireland sold 10-year bonds for the first time since its bailout in 2010.

As a result, officials in Brussels and national capitals said that an aid package for the next problem country, Cyprus, doesn’t even need to be discussed at the summit. It will be dealt with tomorrow starting at about 5 p.m., at a separate meeting of euro-area finance ministers.

Cyprus Options

Euro finance chiefs are considering a mix of options to reduce the size of the Cypriot package to near 10 billion euros ($13 billion) from about 17 billion euros that’s been under discussion, Dutch Finance Minister Jeroen Dijsselbloem, who chairs the ministers’ meetings, said late yesterday in The Hague. Nine months of talks have yet to deliver a solution for Cyprus, which accounts for 0.2% of the recession-wracked euro economy.

The 17-nation currency region will follow last year’s 0.6% contraction by shrinking 0.3% in 2013, the first back-to-back decline since the euro’s debut in 1999, the commission forecasts. It sees bloc-wide unemployment at 12.2% in 2013, with joblessness as high as 27% in Greece and 26.9% in Spain.

Pressure remains on France, Italy and the countries tapping emergency financial aid to make their economies more productive by reducing labor costs and deregulating professions. The commission, the Brussels-based enforcer of the budget rules, fended off attacks from southern Europe that it has been too strict and parried warnings from northern Europe that it is becoming too lax.